[R-G] Alberta Distortions

[Anthony Fenton]

  http://www.progressive-economics.ca/2007/08/08/alberta-distortions/

Alberta Distortions
Alberta Distortions



Jim Stanford

I am big on big investment spending.  I’ve argued for years that weak  
business investment undermines our job creation, our productivity,  
our incomes, and our competitiveness.  I’ve proposed lots of policy  
measures to stimulate more investment spending: public as well as  
private.

But what’s happening in northern Alberta is enough to nauseate even a  
Soviet-esque advocate of mass capital accumulation like myself.

Just last week alone, 3 companies announced $38 billion in new  
capital spending in the oil sands, stretching out for a decade or so.

$38 billion in one week.

In the auto industry, we sweat bullets for years trying to nail down  
investment in an auto assembly plant that might cost $1 billion.

38 times that much is committed for northern Alberta in one week.

I know what the macro consequences of $38 billion in one week will be:

higher dollar
higher wages for the fraction of one percentage point of the national  
workforce employed in the northern Alberta construction industry
higher inflation emanating from Alberta
higher interest rates from the Bank of Canada (and a still higher  
dollar)
higher greenhouse gas emissions
Alberta is already the largest CO2 emitting province in Canada — more  
than Ontario, with 3 times the population.  This will grow  
dramatically with all these plants.

The unbelievable scale of the Alberta investment boom reflects some  
unique features of oil sands:

their immense size and geographical disperson, allowing this  
incredible piling in of simultaneous megaprojects
the unbelievable profitability of digging this stuff out of the  
ground, paying a 1% royalty, and selling it for three times as much  
as it cost to produce
the insatiable hunger for the resource from America, whose strategic  
planners quite explicitly view the resource as “theirs” (thanks to  
NAFTA)
The only risk these companies face with these massive investments is  
how far over budget their construction costs will run.  But with  
returns on equity for oil sands producers averaging about 50 percent  
(that’s 50 percent), there’s an awful lot of room for overrun but  
still turn a huge profit.

What’s happening in Alberta is an utter distorion of economic  
rationality that, if it were being perpetrated by any government,  
would be denounced violently as unsustainable and corrupt.  But since  
it’s private business creating this distortion, it must be fine.

Unlike financial bubbles, which you will know pop sooner rather than  
later (with predictable effects), I am not sure what will bring this  
hyperexpansion to an end.  Regional labour shortages are pinching,  
but they can always find more workers somewhere (imported from China  
soon).  There’s no financial capital constraint: even with the  
current credit squeeze, the banking system will eagerly conjure up  
new spending power to finance projects this lucrative.  There’s no  
resource constraint (the oil sands won’t encounter that for  
decades).  There’s no meaningful limit on the environmental  
destruction these things are allowed to wreak (on top of the CO2  
emissions, there’s massive deforestation involved in the strip mines  
— which adds to climate change from another direction by reducing  
natural carbon absorption).  There’s no limit to the market for the  
product (it’s called America).  And even if oil prices collapsed to  
half their current levels (something no oil analyst predicts), oil  
sands plants would still be a license to print money for the Encanas  
of the world.

In short, the only thing that can stop this unbelievably destructive  
shift –  one that is remaking our federation, our currency, our  
industrial structure, and our environment — is deliberate regulatory  
efforts to reign in oil sands development.  Lots of Albertans are  
opening up to this conclusion.  In the rest of Canada we should be  
pushing much harder, because we pay the costs without so many of the  
benefits.

I think this is a structural issue that will leave its mark on our  
country for the next 50 years.



The Progressive Economics Forum 08/08/07 10:02 PM Jim Stanford  
industrial policy Alberta climate change resources Comments